If you have shares in one or more blue chip companies you might need to make decisions about how you receive your return on investment. So, would you rather receive a fully franked dividend or an unfranked dividend?

Fully franked versus unfranked

Let’s start with a brief explanation. There is an arrangement in Australia that eliminates the double taxation of dividends, known as “franking”. When some dividends are paid out, they are done so with “imputed tax credits” attached to them. These are known as “franked dividends”. The shareholder is then able to reduce the tax paid on their dividend by an amount equal to the imputed tax credits. The idea of this concept is to remove double taxation because the company issuing the dividend has already partially paid tax on the dividend prior to issue.

Exploring the differences with an example

Assume that you have a taxable income in the range $37,000 to $80,000 and therefore your marginal tax rate is 32.5%, plus medicare levy of 1.5%, giving a combined marginal rate of 34%.

Fully franked dividends in action

Using the above scenario, assume you receive a $700 dividend payout into your bank account and a dividend statement showing a fully franked dividend of $700 with a franking credit (sometimes referred to as imputation credit) of $300.

When completing your 2014 income tax return you will have to show both the $700 fully franked dividend received, PLUS the $300 imputation credit as assessable income, and will have the $300 allowed as credit in your tax assessment.

As your marginal tax rate is 34% income tax payable will be $340 ($1,000 @ 34%) less imputation credit of $300 resulting in net income tax payable of only $40.

Unfranked dividends in action

Using the above scenario, assume you receive $700 into your bank account and a dividend statement showing an unfranked dividend of $700, with franking credit of NIL.

The big difference is found when completing your income tax return.

You will only have to show the $700 unfranked dividend that you received, which gives the impression of a beneficial result. However with an unfranked divided you are not entitled to any franking credits and at a marginal tax rate of 34%, your income tax payable will be $238, much higher than the $40 payable in the first example.

What this means to you

Results will vary depending on your tax rate but from the examples above you can see that many income earners, particularly lower income earners, will benefit greatly by paying less tax on fully franked dividends. Not all companies pay fully franked dividends and the best option for you will depend on your individual circumstances. Please feel free to drop us a line if you would like to discuss this further.

could you please share an example where franking ( 60 %) and unfranking ( 40%)

Brian // 17/05/2015 11:24 PM

Thank you for the explanation between franked and unfranked dividends. Am I correct in thinking in the above example that the imputation credit $300 is the 30% tax the company has paid.

So in the unfranked situation, where no tax has by paid by the company, why is the dividend only $700 and not $1,000

Ben // 08/04/2017 8:00 PM

@Brian. Yes I believe if the company pays an unfranked dividend then instead of sending 30% company tax to the ATO they pay 100% of dividend profit to the shareholders for them to sort out out the tax. Otherwise where has the franking credit disappeared to?. It pretty much makes the authors above scenarios irrelevant.

Ali // 26/04/2017 11:33 AM

When you receive an unfranked dividend – this means that company was not able to give you any imputation credits on the money you are receiving. The company has not already paid tax on the money you are receiving.

Unfranked dividends are common when you invest in companies which do not pay much company tax because they have a lot of tax deductions available to them – so while they have money they are able to pay to their investors, they do not pay tax. If a company does not pay tax they are not able to give you a credit for tax they have already paid. This results in any profits you receive being Unfranked dividends.

Ali // 26/04/2017 11:33 AM

When you receive an unfranked dividend – this means that company was not able to give you any imputation credits on the money you are receiving. The company has not already paid tax on the money you are receiving.

Unfranked dividends are common when you invest in companies which do not pay much company tax because they have a lot of tax deductions available to them – so while they have money they are able to pay to their investors, they do not pay tax. If a company does not pay tax they are not able to give you a credit for tax they have already paid. This results in any profits you receive being Unfranked dividends.

irene // 14/09/2017 7:20 AM

I am utterly confused. For years I have been receiving franking credits from IAG but the franked amount is always - almost double the franking credit I receive. Can I claim this amount through the ATO or just contact the company to have it added to the credit I receive.

Jax // 10/11/2017 11:34 AM

The above example is misleading. The total amount of tax paid on company profits in the hands of shareholders is usually the same, irregardless of whether franked or unfranked dividends.

Using the above example, the company makes a $1,000 profit. It pays tax at 30% on the profit. It distributes $700 cash + $300 franking credit to the shareholder. The shareholder has a total income of $1,000 from the company. The $1,000 is added to their total income from all sources. The applicable tax is calculated on all of the income. From the tax payable figure, $300 is deducted because **this tax has already been paid on behalf of them by the company**.

Let's say that they are in the 34% tax bracket. $1,000 x 34% = $340 tax payable less the $300 already paid to them.

The other scenario: Company makes $1,000 profit. It decides to pay an unfranked dividend. It pays no corporate tax and distributes the entire $1,000 as a dividend (cash). The shareholder receives $1,000 cash. Includes it in his/her tax return. Calculates tax. With no franking credits attached, the calculated tax, is the final tax payable.